Internet users can purchase virtually everything via online auctions. Auctions range from computers, to collectibles to real-estate. Ebay is the leading auction site, and essentially it is a marketplace where buyers and sellers can interface.

Online auctions typically last for a fixed period of time, usually seven days. Bidders enter the highest amount they are willing to pay for an item. The highest bidder at the close of the auction earns the right to purchase it at the agreed price. All of these seems straightforward, but the nature of the bidding is something that few people are aware of.

Ebay, along with some other popular auction sites, employs the use of proxy bidding. Perhaps the easiest way to explain proxy bidding is to provide an example. Suppose that a seller has listed some mangosteen juice for sale on Ebay and the auction ends on Friday. Sometimes there are many people that are interested in an item but for the sake of simplicity, let's assume that there are only two people interested in this particular auction: Ludvig and Johann.

Johann discovers the auction on Monday and places a bid for $1.00. On Tuesday, Ludvig notices the auction and sees that someone else (Johann) has already placed a bid. Ludvig is interested in purchasing the mangosteen juice, but he won't be able to monitor the auction since he is very busy. So instead of entering $1.25 as his bid (he couldn't bid $1.01 because Ebay has minimum-increment requirements), Ludvig enters $9.63. He enters this as a regular bid, but only Ebay 'knows' this amount - it isn't revealed to anyone else. On the auction listing, Ludvig is shown as the highest bidder with a bid of $1.25 even though he bid much more. Ebay has placed the lowest bid possible on behalf of Ludvig.

On Wednesday, Johann checks the listing again, and sees that he has been outbid, and so he places a bid of $1.50, but seconds later he sees that the highest bidder is listed as Ludvig for $1.75. Ebay has instantly placed a bid on Ludvig's behalf - again the lowest amount possible to remain the high bidder. Johann is frustrated and continues to place bids; the process continues until Johann reaches $3.00 at which point he gives up. No other bids are placed, and when the auction closes, Ludvig is pronounced the winner for $3.25 (one bid increment higher than Johann's highest bid) even though the bid he entered was $9.63.

So you can see that on those sites that use proxy bidding, it is safe to bid as much as you are willing to pay for an item. You are only going to have to pay one-bid increment more than the highest opposing bidder. Of course, if someone outbids your maximum bid, then you will not win the auction.

To get the most out of online auctions, you should also read our related article called what is auction sniping?